Importance of Creating Emergency Fund

You invariably need money to propel your life ahead. Without Money, your life comes to a standstill. So, under any circumstances, Personal Fund Management becomes the key for a financially secured future. In this perspective, the importance of creating emergency fund comes to the forefront.

As a matter of fact, an emergency situation can arise at any time. It might happen that you may lose your job, face an accident, come across a personal financial dilemma, suffer from an illness, or face a major expense. In all of these situations, an emergency fund is the only savior for you.

What is an Emergency Fund?

So, an emergency fund is an account that you set aside to meet any emergency situation which requires some financial commitment. These emergency situations can be in the form of a sudden loss of job, an accident, a prolonged illness, some major expense, or a personal financial dilemma.

An emergency fund creates a safety net of funds which can be used to meet emergency expenses. It reduces the need to draw funds from high-interest debt options.

Most of the financial planners suggest that an emergency fund should have funds equivalent to at least three months of living expenses. It is the bare minimum for an emergency fund. Some go to the extent of suggesting that an emergency fund should cover at least six to twelve months of living expenses. So, a married couple, who is earning $108000 annually after taxes, should have a minimum of $27,000 to $54,000 in their emergency fund account.

Plus, the emergency fund should be highly liquid, meaning that it should be easily accessible in case of an emergency situation. So, the emergency fund should be in checking or savings account.

It should be noted that financial institutions do not provide a separate emergency fund account. So, you should label one of your accounts as emergency fund account and keep funds in it reserved for any personal financial crisis.

You should never consider using the money reserved in emergency fund account to pay for normal expenses. Instead, you should create an emergency fund account and keep accumulating money in it.

So, an Emergency Fund is one of the golden keys to a safe and glorious future. Saving money should be among the top priorities of an individual. Expenditures and savings go hand in hand, and there should be a proper mix of these two heads so as to strike a proper balance according to one’s lifestyle requirements.

But is saving money so easy and popular among the population? If this were the case probably, we would not have raised the question.

Why you need an emergency fund?

Two major factors contribute to the importance of building an emergency fund.

One is the very uncertain and unpredictable nature of life. The second is, there is no surety of regular inflow of funds.

Let us try to understand this first before moving any further. Life itself is full of uncertainties. One who is happy and living a satisfied life can suddenly become unhappy due to some tragic and unforeseen event in one’s life.

It might be the case that one may meet with a severe accident. One can seriously fall ill due to some critical illness. One might suffer big losses in business. It might also be possible that one can lose a highly paid job. There might be any other situation which can result in a sudden requirement of funds.

So, on one side you may face hardships, which most of the time require your inner strength together with a financial obligation and on the other side there may be an effect on your regular flow of income.

Your regular earnings might get affected because of the present tragic situation. And in most of the cases, you do not have any control on both of these factors.

Now the question arises how you will going to take care of yourself, your family and all the rest of the allied. Savings then play a crucial role in providing the much needed financial help to you for overcoming these problems.

But if you do not cultivate the important habit of saving money, how would you going to have enough balance in your saving account to meet the critical situations in your life.

So, it should be taken as a rule that a proper balance should always be maintained between the expenses and savings. How early one learns and implements this principle in one’s life is the main challenge and requirement and the key to personal security and success.

Real prosperity is achieved by only those people who can save enough money to take care of themselves and their families in times of need.

So money is needed for you not only for your day to day needs and aspirations but also to pull you out of a bad time. You have to create what is known as an “Emergency Fund” for yourself.

How much money should you have in your Emergency Fund?

Having realized the importance of emergency fund, now the question comes that how you can achieve this for yourself and what amount you need to have in place for yourself.

Invariably you should plan your expenses and set a target of achieving at least a minimum balance of six times your monthly earnings as your “Emergency Fund.” This is considered as a standard rule.

So, if you are earning 1000 Dollars in a month, then 6000 Dollars should be the balance in your Emergency Fund.

Thus apart from the regular and total expenses, you should always allocate a regular minimum sum of money to this fund so as to achieve this figure and also increase it on a regular basis.

This “Emergency Fund” will then be enough to take care of your needs for six months at least. If you can meet your daily expenses without any trouble or without taking any financial aid from outside sources, you can put your resources, time and energy in reviving yourself from the tragic fallouts.

So you come out of the troublesome time with flying colors. Such is the importance and value of the “Emergency Fund.”

Concluding

Now perhaps we can understand the importance of having an “Emergency Fund” in place for ourselves. We have also understood how we can achieve this and how much value should be kept in this fund.

A successful implementation of this saving strategy can lead you to achieve and lead a safe and secure life independently and thus have a much-desired peace of mind. So we should begin saving and build on our personal “Emergency Fund.”

Disclaimer

Any information which is provided on this website is for educational and entertainment purpose only. Any information on this site is personal opinions and should not be constructed as financial advice. Before taking any financial decision on saving, investment, insurance etc please consult it with your financial adviser. MoneyGlare.com and nor its owner are responsible for any of your financial decisions and your financial result which are taken as advice from moneyglare.com. This is our own views not recommendations so take any financial decisions on your own after proper research.